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During the second term of his presidency, Ronald Reagan said, “It’s true that hard work never killed anybody, but I figure why take the chance?” Some 33 years later, famous investor Warren Buffett repeated the quip — and it carries a strong lesson for new investors.
Buffett quoted Reagan in his 2020 letter to the shareholders of Berkshire Hathaway, the conglomerate where he serves as CEO and chairman. The context was Buffett’s explanation of Berkshire Hathaway’s investment strategy.
The conglomerate invests in businesses with good fundamentals. It controls some of those businesses and owns non-controlling positions in others. Buffett used Reagan’s words to talk up the merits of owning non-controlling shares. The strategy produces acceptable returns and, even better, it’s less work than having full control. As Buffett says, “you are awarded no points in business endeavors for ‘degree of difficulty.'”
The effort of investing
As an individual investor, you likely don’t have the option to buy a going concern outright. But you can choose your own investing strategy. And the approach you pick dictates your investing workload. For example:
You could try your hand at day trading. This is only an option if you can devote full-time hours to researching companies and responding quickly to intraday share price changes.
You could buy individual stocks that look promising now but have some uncertainties long-term. You’d spend your off-hours researching companies and monitoring the trends that affect them.
You could buy individual stocks that you intend to hold forever. Your research burden is mostly up-front, but you’ll pay attention to any big developments that affect your portfolio.
You could buy broad-based index exchange-traded funds (ETFs). You’d have some work up front to pick your funds and then some occasional rebalancing.
The usual justification for a higher-effort investing approach is the opportunity to earn more. Unfortunately, that doesn’t always happen.
Take the performance of actively managed mutual funds vs. index funds as an example. An actively managed fund has a manager who’s monitoring trends and trading stocks opportunistically. An index fund invests in stocks that comprise an index, like the S&P 500, without regard for trends and market climate.
Several studies show that actively managed funds underperform their benchmarks over time. In other words, even professional investors have trouble beating the market consistently. Though the fund manager’s job is far more difficult than following an index, the extra effort often doesn’t translate into profits.
Easy investing 101
The takeaway is that there’s no shame in low-effort investing. Buffett does it and you can, too, albeit on a smaller scale. You might find that the simplest approach produces the same or better returns than a more difficult path.
Image source: Getty Images.
A popular low-effort investing strategy is the index fund portfolio. That portfolio can be as simple as an S&P 500 ETF and a fixed-income fund for stability. You’d choose funds with a low expense ratio and a history of performing close to their index.
Your keys to success with this type of portfolio are:
Hold through market volatility. An index fund portfolio banks on the long-term growth of the market, so you must stay invested.
Reduce the risk in your portfolio as you age. You can reduce your risk by increasing your fixed-income exposure. This gives you more financial stability as you approach retirement when you’ll need to tap your investments for income.
Less can be more
Stock picking is work-intensive for the individual investor, just as running companies is high-effort for Berkshire Hathaway. In either case, there’s no guarantee of higher returns for choosing the more difficult strategy.
If you enjoy stock-picking, great. You won’t view the number-crunching and report-reading as hard work. But if you don’t enjoy stock-picking, that shouldn’t keep you out of the stock market. Take the easier road and build wealth with low-maintenance index funds instead.
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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
